Traders returned from the holiday in an optimistic mood, propelling stocks higher on increasing volume. After opening flat, the broad market trended steadily upwards throughout most of the day. The Nasdaq Composite continued to lead the stock market, accelerating 1.3% higher. The S&P 500 rallied 1.1%, while the Dow Jones Industrial Average lagged slightly with a 0.7% gain. The small-cap Russell 2000 gained 1.0% and the S&P Midcap 400 advanced 1.2%. Like the previous session, selling in the final thirty minutes of trading caused each of the major indices to give back about one-third of their intraday gains.

Total volume in the Nasdaq surged 20% higher yesterday, enabling the index to register a bullish "accumulation day." In the NYSE, however, volume ticked 2% lower. It's positive that the Nasdaq's gains were confirmed by stronger volume, but turnover in both exchanges still remained below average levels. This tells us that institutional investors and professional traders apparently are not that anxious to jump back in the markets. Nevertheless, market internals were solid. Advancing volume in the NYSE exceeded declining volume by a margin of 4 to 1. The Nasdaq ratio was positive by nearly 6 to 1.

One industry sector that is starting to see institutional buying interest is the Biotech Index ($BTK). Yesterday, the index outperformed the major indices by gaining 1.9%, broke out above a multi-month downtrend, and closed back above its 200-day MA. This is illustrated on the daily chart of the $BTK below:


The red dashed horizontal line at the 795 level marks price resistance from the prior highs of July. The index tested that level yesterday, but backed off into the close. If the $BTK manages to break out above that price, it should see a decent amount of upward momentum in the short to intermediate-term. The 200-day MA, right at yesterday's low, should serve as solid support. A break back below that level would be bearish and indicate a failed trend reversal in the sector. ETF tickers correlated to the Biotech sector are: IBB, BBH, FBT, PBE, and XBI. We remain long IBB from our August 31 entry, though we have trailed the stop higher, to near break-even, in order to protect against a failed trend reversal. As you can see, the IBB chart looks similar to the $BTK Index:



The Oil Service HOLDR (OIH), which we also bought on August 31, gained more than 4 points (2.4%) yesterday. It has now rallied beyond resistance of the 61.8% Fibonacci retracement from its July high to August low. This increases the odds of OIH moving back up to its all-time high that was set on July 23. However, there is a bit of horizontal price resistance from July as well:



OIH closed just above the pivotal area of resistance shown above, but we have trailed our stop much tighter in order to protect the profit if it falls below yesterday's close. Specifically, we don't like that OIH has climbed on lighter than average volume. A pullback from here would probably send OIH back down to support of its 50-day MA, but we're not willing to hold through such a retracement at this time. Why not? Because both the S&P 500 and Dow Industrials closed right at critical tests of their 50-day MA resistance. If they fail to move back above their 50-day MAs within the next day or two, it could lead to a substantial short-term pullback in the broad market. Consider having tight stops on all long positions outside of the Nasdaq.

Open ETF positions:

Long - OIH, IBB, TLT, LQD
Short - (none)

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and Morpheus Trading Group, a trader education firm launched in 2001 that provides daily technical analysis of the leading ETFs and stocks. For a free trial to the full version of The Wagner Daily or to learn about Wagner's other services, visit MorpheusTrading.com or send an e-mail to deron@morpheustrading.com.